Here's What's Concerning About Nan Yang Dyeing & FinishingLtd (TPE:1410)

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Nan Yang Dyeing & FinishingLtd (TPE:1410), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Nan Yang Dyeing & FinishingLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.063 = NT$82m ÷ (NT$1.4b - NT$67m) (Based on the trailing twelve months to September 2020).

Therefore, Nan Yang Dyeing & FinishingLtd has an ROCE of 6.3%. On its own that's a low return, but compared to the average of 4.0% generated by the Luxury industry, it's much better.

View our latest analysis for Nan Yang Dyeing & FinishingLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Nan Yang Dyeing & FinishingLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Nan Yang Dyeing & FinishingLtd Tell Us?

There is reason to be cautious about Nan Yang Dyeing & FinishingLtd, given the returns are trending downwards. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Nan Yang Dyeing & FinishingLtd to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 65% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Nan Yang Dyeing & FinishingLtd (of which 1 can't be ignored!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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